Question

1. what is a bank failure?

2. how do you prevent bank failure

3. what causes bank failure?

Answer 1

1. A bank failure is for a federal or state regulator to close an insolvent bank. The currency controller has the power to close national banks; banking commissioners closing state-chartered banks within the respective states. Banks close when their responsibilities towards depositors and others can not be fulfilled. The Federal Deposit Insurance Corporation (FDIC) deals with the insured part of a depositor's fund, like money market accounts, when a bank fails.

2. Bank are extremely limited in what they can do to reduce the number of bank failures. We are barred from other forms of financial transactions and activities which are deemed too risky. Banks are expected to maintain a net worth minimum as a fraction of the total assets. FDIC authorities perform audits and other reviews of individual banks on a regular basis to ensure they work safely.

The FDIC has the power to close a bank the net value of which falls below the amount necessary. In fact, when it is insolvent, it usually acts to close a branch, that is, when its net worth is negative. Negative net worth means that the liabilities of the bank outweigh those of its assets. When a bank is closed by the FDIC it arranges depositors to collect their funds. If the assets of the bank are inadequate to recover deposits from customers, the FDIC uses money from the insurance fund to this end. Instead, the FDIC could arrange that another bank buy the bank that failed. Nonetheless, the FDIC aims to ensure depositors won't lose any money.

3. Banks collapse because they can not meet their commitments any more. If depositors demand it, they may lose too much on investments or become unable to provide cash.

Ultimately, accidents happen because it is not just banks that store the money in vaults. If you walk in and deposit cash (or electronically deposit funds) the bank is investing the money. A simple type of investment is to make loans to other bank clients so they can gain interest and pay you interest on your deposits. Banks also invest in way that is much more complex. If the bank loses heavily in any one region, it risks failing